How to Pay Taxes on Your Bitcoin Investment

A lot of people have been dabbling in bitcoins over the past year, which has mostly led to big thinkpieces about what it all means. But it also raises a practical question. If you've made bitcoin investments, do you have tax liability? And if so, what kind? As Catherine Hollander writes, the IRS isn't sure:

The heart of the issue is whether the IRS will view bitcoins as a currency or a commodity.

But the government remains mum: "The IRS is aware of the potential tax-compliance risks posed by virtual currencies," the agency said in an emailed statement. "The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences of virtual-currency transactions."

Top Comment

I was under the impression from reading the Internet that if I changed all my money into Bitcoin it wouldn't be considered money any more. More...

In theory, IRS administrative decisions about the tax treatment of relative minor entities shouldn't be a big deal. But in practice it often doesn't work out that way. When word first came down that hedge fund and private equity managers could classify a lot of their income as "carried interest" and therefore pay the lower capital gains tax rate, that wasn't intended as a major public policy initiative. But once the loophole exists, people exploit it and it grows in significance over time. Congress could always step in and close loopholes of that sort, but in practice changing laws is very difficult in the United States—you need a House majority, a Senate supermajority, and the president's signature—so once something becomes a big deal that some set of people are benefiting from it can be very challenging to change.

I don't really foresee anything like that happening with cryptocurrencies, but it's at least possible and worth keeping an eye on.